Deflating the biggest myth about starter homes

Hands holding a house

Many people think they should buy a home as early in their adult lives as possible to "stop throwing away money on rent." So they buy a small home that makes sense at the time given their living situation and finances.

The home only needs to suit one or two adults, and needs to be inexpensive enough for someone who is just beginning a career and may be paying off student loans or other debt incurred during college.

This property isn’t meant to be a permanent home. Real estate agents call these "starter homes."

A few years later, when the young homeowner is ready to get married and have kids, she might want to sell the starter home and move up into a larger, nicer, longer-term home more suitable for a growing family.

But when she sits down to crunch the numbers, she might discover she’s going to lose money. She would have been better off renting.

Indeed, this is a surprise since buying a starter home is typically presented as sound financial planning -- period.

Turns out that's not always the case.

Many variables influence whether your house will pay off, from the purchase price and your mortgage rate to the cost of repairs and maintenance. How long you live in the home and how much equity you build are also big factors.

"If you know you are going to move in a year, then buying may not be your best financial decision in the current marketplace," says Atlanta RE/MAX real estate agent Larissa Benson. "But if it’s a question of waiting until you are married with children, and the timeline on those items is unknown, then I would go with what is known, and that’s that you can get an amazing home for an amazing price and with an incredibly low payment in today’s market."

But just know that you might be surprised at what your home is worth when you want to sell it.

Given the decline in home values over the last five years, it’s quite possible you’ll have to either stay there or sell it at a loss. Or, when interest rates bounce back from their record lows, they could increase so much that buying another home isn’t a viable option.

“No longer can you expect your home's value to increase at 10% per year," says San Francisco- and New York-based Realtor Brendon DeSimone. "I tell buyers that if they are not in it for at least three to five years, they shouldn't be buying."

Indeed, prospective home buyers need to know that buying a starter home is not necessarily going to make them any better off than renting, and it might make them worse off.

One option is to skip the starter home and go straight for the permanent home.

"In today’s market, with our all-time-low rates, most buyers can actually afford the step-up home for the same price they are paying in rent, and the starter home for less than rent," Benson says.

Another option is to seek out a house with above-average appreciation potential.

"My advice to buyers today is to try to find or create a value add," DeSimone says. "Be open to a small kitchen or bath remodel, or some ways to add value. Be open to a newer or emerging neighborhood. You just can't purchase and sit around and expect to have a huge profit when you go to sell."

An alternative to selling your house might make the whole proposition much more lucrative.

Keeping that home as an income property when you move on to your next home might make sense. You'll just need to determine if you can rent the house for a price similar to your monthly mortgage payment.

If you want to pursue this route, Boca Raton real estate broker Janice Leis says you should choose a home in a great area that represents a great value.

"Buy something comfortable, finished and easily rentable," she says.

Homes close to colleges will have demand both for resale and as rentals and can form the foundation of a great investment portfolio, she says.